How To Trade Penny Stocks

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In this article, I’m going to cover the topic of how to trade penny stocks.

The first part we’ll start with is OTC. OTC is an abbreviation for “over the counter”. When you buy stocks you’re buying from the OTC market.

Specifically:

  • OTCQX: This is the top teir for investment securities.
  • OTCQB: The middle tier for investment securities.
  • OTCPink: The bottom tier. This is where the term “pink sheets” comes from.

The OTCPink market is further sub-divided into 3 additional markets:

  • Pink Current: Discloses all information by making it’s filing publicly available.
  • Pink Limited: Discloses a limited amount of information to the public.
  • Pink No Information: Discloses no information to the public.Is either not willing or unable to.

What’s the best way to find penny stocks to buy?

If you want to trade penny stocks I would suggest you first check out stock screeners OTCMarkets.com. Next I would become active on investment forums like InvestorHub.com, and finally you can find penny stocks via word of mouth advertising..

So you would start with the screeners, and look for super cheap stocks (the cheapest a penny stock can be listed is 001). Then look for cheap penny stocks that have volume. That have interest and activity around them. You don’t want to waste your time on a dead stock that’s not moving.

Once you’ve found a few stock picks, go to the forums to get some advice and information on.

How do you evaluate risk?

When you watch CNBC or any finacial news station and you see that ticker bar on the bottom, those stocks are known as big board stocks (the Nasdaq, New York Stock Exchange, AMEX etc).

Unlike the big board stocks, most of all the OTC stocks come with a high level of volatility and thus risk. But, the greater the risk, the greater the profit you can make. One risk for example is that penny stocks can go what is known as “NO BID” which means the penny stock can be bought but not sold.

The flip side is the OTCPink can produce some amazing returns. It’s not unrealistic or uncommon for a penny stock on the OTCPink market to appreciate in value 800% in one trading day (mind you though, we are talking about stocks price cheaply).

penny-stock

Reverse Splits

When learning how to trade penny stocks be aware of reverse splits. Splits normally give an investor more shares than they previously had. For example I have a share of General Motors and it splits. Now I have two shares. A reverse split is the opposite. You get 1 share for every x amount of share you own. X is decided upon the company. So for example, you get 1 share for every 10 shares you own.

If you owned 100 shares how many shares would you own after a reverse split? Right, 10 shares. Reverse splits hardly ever produce positive results for penny stock traders. One a penny stock does a reverse split its price tends to dip down to .0001 price per share untill the company decideds to reverse split again. It’s designed to be a postivie move for the investor, but when it comes to penny stocks, ones that have reverse splits excesivly the’re too speculative because they typically want to lower their price to attract investors who were not tracking the stock.

How do you protect yourself? Check the historical data over on a website like StockCharts.com. If you see an abundance of reverse splits or a pattern, avoid the stock.

Dilution

Dilution is the lowering of the ownership percentage in the company because new stock is issued. For penny stocks, what we want to pay attention to is the current share structure.

To find out the current share structure you need to call or email the transfer agent associated with the penny stock (all penny stocks have a transfer agent). What you want to ask about is shares outstanding, float and authorized shares. This is public knowledge and will be disclosed upon you asking. The value of finding this information out is it will help you the investor avoid purchasing a penny stock that is too diluted to move rapidly.

In some instances however, you will find that the TA is “gagged”. This means the transfer agent has been instructed by the company to not disclose share structure details. A gagged TA is usually a good reason to avoid investing in an already speculative penny stock.

A stock that is less diluted can move in share price much more quickly, especially if it gets news and all the investors flock to it. Unlike a big board stock that would take millions of shares moving to make a difference.

Stock forums

Stock forums are great place to learn from other traders and to share their research. While in a forum always be skeptical. Never take anything as fact. Do your own research on the opinions of others, and definitely be aware pumpers and bashers (people who cheerleader a stock, and those who tell of coming gloom and doom for a stock).

In a nutshell you will gain a lot from joining a forum but do your own due diligence. Profitly is also a good place to improve your trading.

Press releases

Press releases, companies release these to showcase new developments within the company. You can normally obtain them from your broker or from an online source. The things you need to be aware of as it related to learning how to trade penny stocks:

  • Avoid companies that have made false claims in the past. A press release is an official news announcement. If it’s filled with false information then it’s a company to not be trusted.
  • Check historically to see that the company regularly communicates with investors in the past. 
  • Read the release to take note of when any significant event is to occur like financials being released. The price per share of a penny stock usually increase upon the release of a press release and good news further drives up the price.

Limit orders

USE limit orders for buying penny stocks. The price for penny stocks moves rapidly. You have two options, a limit order or a market order. A limit order tells the broker to buy the stocks at the price you’ve indicated where a market order tells the broker to buy the stock at market value.

If you ordered a million shares at a price of .0001, you will owe $100. If that stock price jumps to .01, and you used a market order, you’re going to owe a lot more money :)

Level 2 market depth

Once you’ve traded a few penny stocks, you’re eventually going to want to familairize yourself with level 2 market depth. Level 2 market depth is avialble through all online brokers (for the most part). L2 as it’s known, is not always availble for OTC stocks. So find a broker who offers L2 for OTC stocks.

What you’re going to want to pay attention to with L2 is the BID and ASK because knowing this information can allow a penny stock trader to find patterns and signs of when it’s time to buy or sell.

Establish an exit plan by determining what level you will sell of 

First thing, remember how we had limit orders? Well we also have limit sell orders. It’s the same thing, you can set a price per share point that when the stock reaches that price point you will automatically sell off a portion of your holding. The profit you make should exceed the original purchase price. Make sense?

So you will still own some shares, but because the price for penny stocks move so fast, we want to make our money back and also a small profit. It also keeps emotional trading in check. So we don’t let our feeling get us carried away and make poor decisions.

Once after the limit sell order, the remaining stocks can be considered freebies. If the stock continues to do well, they you’ll make even more. If the stock drops in price or goes NO-BID or reverse splits, it’s OK because you’ve already made a return on your investment by selling a portion of the shares you owned.

Only invest what you can afford to loose

Most of the time with penny stocks you will loose. However when you win, you win BIG with penny stocks and those abundant profits more than make up for the numerous small losses. Thanks for reading!

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